Diageo threatens to drop Cuervo

24th August, 2012 by
Ron Emler

Diageo will drop the José Cuervo Tequila brand from its portfolio unless it negotiates a satisfactory equity stake with the owning Beckmann family.

Paul Walsh, Diageo’s chief executive, said yesterday that he was not prepared simply to renew a global distribution deal for José Cuervo when the current agreement expires next year. He would walk away from it instead, he said.

Talks with the Beckmann family have been underway for more than a year and initially Walsh had set an internal deadline of June for concluding them. Yesterday he told a London press conference that the future of the relationship was “in señor Beckmann’s hands” and that Diageo could not control the timetable for future negotiations.

Walsh had said previously that the minimum outcome he would accept is partial ownership of José Cuervo and that the brand owners (the Beckmann’s) could not expect Diageo to distribute and further develop it in the global marketplace without more adequate reward to Diageo’s shareholders.

Industry sources suggest that Diageo would like to take full ownership of the José Cuervo brand as well as the production facilities (including the vital agave cactus holdings) for about $3 billion, although Walsh declined to comment on whether a formal offer had been made.

But it now seems the negotiations have reached a critical stage. Indeed, it is possible that Walsh’s threat to walk away from José Cuervo is designed to put further pressure on the Beckmann family. Earlier he had said that it would not be difficult to run down stocks prior to the present agreement ending next June if that was what the Beckmanns wanted. Equally, he emphasized that he would like a mutually beneficial outcome to the negotiations.

Despite having a very strong balance sheet (free cash flow in the year to the end of June was £1.6 billion), Walsh constantly stresses that Diageo will not overpay for any acquisition simply because of its size and financial clout. Each deal must meet stringent criteria on returns on capital before it is considered.

Tequila represented 3% of Diageo’s net sales in the year to the end of June, making the category worth just more than £320m to the group’s £10,762m turnover. But while José Cuervo sold 3.9m cases, that represented a fall of 5% in sales, notably because, Diageo says, “Consumers are shifting away from dark tequilas”.

Paul Walsh

By contrast, Diageo’s Don Julio brand increased its sales by 26% to outperform the fast-growing super premium segment. Diageo’s marketing and pricing strategies are designed to move all its brands further up the premium price ladder.

While there can be no doubt that Walsh would like to retain José Cuervo in Diageo’s portfolio, if the Beckmanns refuse his offer, the world’s biggest tequila brand could end up looking for a new distributor.

There is constant speculation that a premium tequila would fill the remaining hole in Pernod Ricard’s portfolio, but the French group has stressed that it is not about to make a “transformational” acquisition and it too much prefers to own brands rather than merely to distribute them. Meanwhile, Beam Global owns the number two Tequila, Sauza, and Bacardi has a stake in the Patrón brand.